As It Gains Greater Utility, Virtual Currency No Longer Just Plays Games

By Jim Daly

The U.S. virtual-currency market grew 52% in 2012 and this year it could more than double to $10.9 billion in purchases, according to a new report from Javelin Strategy & Research. What’s more, virtual currency is moving beyond its online-game moorings and into more real-world settings, though it’s still far from replacing dollars, yen, and euros.

Based on an online survey of 3,217 American adults last October, the report released today estimates that 47 million consumers bought $4.65 billion in virtual currency last year, up from $3.05 billion in 2011. While the general-purpose Bitcoin virtual currency has received a lot of publicity lately, the biggest single use of virtual currency remains the purchase of digital goods within a social-network game, according to Javelin senior analyst of payments Nick Holland. Such purchases accounted for 34% of virtual currency spend last year.

But social-network games, such as those developed by Zynga Inc. and frequently found on Facebook, account for a declining share of virtual-currency usage. In 2011, for example, social gaming captured an estimated 44% of virtual spend. Part of the slippage stems from consumers’ relatively short attention spans with online games, a phenomenon that has hit Zynga and Blizzard Entertainment Inc.’s World of Warcraft hard. “The novelty has worn off,” says Holland. Zynga also is scrambling to catch up to its former customers who have abandoned its PC-based games in favor on playing games on mobile devices.

Instead, usage of virtual currency is becoming more “bi-directional,” meaning it can be used to buy real and digital goods, and exchanged for real currency, Holland says. Digital entertainment downloads accounted for 19% of virtual-currency usage last year versus 16% in 2011 while purchases of vouchers redeemable for real-world goods or services grew from 13% to 17%. Other rising uses include purchases for digital goods and gifts, avatars, prepaid cards, and the like.

Still, usage of virtual currency to directly buy real-world goods remained static at about 16%. “The big issue is there is hardly anywhere you can go and buy something with virtual currency,” says Holland.

Another usage of virtual currency poised to take off is person-to-person payments, especially in social-network settings. Leading social network Facebook, however, has abandoned its Facebook Credits virtual currency, a currency that network members used during its short life mostly for online gaming. While not the only reason, new U.S. Treasury Department regulations imposing “know-your-customer” and related policies on non-bank money-service providers helped to sour Facebook on its virtual currency, according to Holland.

But with hundreds of millions of users who potentially could use its platform to pay each other, Holland wouldn’t be surprised if Facebook eventually revisits virtual currency. “It’s something they may come back into,” he says. “Facebook lends itself to being the world’s greatest P2P network, if they can monetize it.”

The survey didn’t ask which virtual currency consumers use the most. Bitcoin, the best-known of a mostly obscure bunch, has been in the news in recent months because of its growing popularity and the cold reception it’s getting from law-enforcement officials and some politicians who see it as nothing more than a way for drug dealers and money launderers to do business anonymously. But consumers are beginning to embrace it. When a banking crisis hit Cyprus earlier this year and the government proposed taxing bank deposits, many residents of the Mediterranean island nation converted funds into Bitcoin to avoid what they feared would be confiscation of their wealth.

“The Cypriots were looking for alternatives,” says Holland. “Mostly by word of mouth Bitcoin became a means of storage, at least on a temporary basis.” He adds that despite its volatility, Bitcoin “also has had some traction” in countries such as Iran, which faces economic sanctions.

If anything, the rise of Bitcoin is a warning to financial institutions steeped in payments tradition. “The financial-services industry has to be aware that the barriers to entry are becoming lower,” he says. “Newcomers can come to market in a purely digital sense.”

Pleasanton, Calif.-based Javelin also found that virtual-currency users are more likely than consumers overall to use alternative financial products. For example, they’re three times more likely to own prepaid cards than all consumers, 39% vs. 13%, even though they report similar rates of ownership of regular debit and credit cards. Holland surmises that virtual-currency users by nature are fairly open to using newer financial products, and many also have characteristics of younger consumers who tend to be heavier prepaid card users.

The survey was based on representative samples of the U.S. adult population and has a margin of error of plus or minus 1.73 percentage points at the 95% confidence level, Javelin says.